Pyramid Scheme a Trap for Many Romanians

By JANE PERLEZ,

Published: November 13, 1993

CLUJ, Romania, Nov. 8—
For more than a year, a fraudulent financial scheme involving about three million Romanians paid 800 percent profits to investors who deposited money for three months. These newly rich spent lavishly on previously unimaginable luxuries like refrigerators, washing machines and even vacations abroad.

But for the last several weeks, the Ponzi-style pyramid scheme, which economists say has pulled in the equivalent of $1 billion to $5 billion, has failed to pay back anything. Tens of thousands of Romanians, who live in one of Eastern Europe's grimmest economies, face losing their meager savings, while the scheme's founder is said to have stashed away as much as $40 million. Government officials, fearful of riots and protests, are reluctant to stop it.

How the scheme -- known as Caritas, after the Latin derivative for charity -- took such hold seems to be a story of crude political forces and the susceptibility of an impoverished society desperate for better times. It also involves the unrealistic expectations of a people who have heard about capitalism but never experienced it.

The effects of the scheme's crash are likely to be particularly severe, economists say, because it comes as the Romanian Government is preparing to sign an agreement with the International Monetary Fund. Under the agreement, Romania will receive $300 million in I.M.F. loans plus $200 million from elsewhere. But in return, the country must take austerity measures that would result in short-term higher fuel and food prices.

At the Caritas offices here, depositors wanting to claim their profits after the required waiting period of three months have been turned away for several weeks. The founder of Caritas -- who, until recently, had been transformed from a little-known bookkeeper into an almost unassailable national folk hero -- harshly told a desperate elderly man at the scheme's office in the mining town of Petrosani today that he was "ruining the game" by demanding gains from money deposited in July.

Inside, two dozen young women sat behind computers in an empty room waiting for customers. But a month ago, the crush was so great that people slept overnight in tents outside the sports stadium here waiting to make deposits -- sometimes only 2,000 lei, or about $2, or sometimes pools of 200,000 lei ($200) collected in factories and mines. Those people, whose average wage is about $60 a month, are almost certain never to see their money.

Romanian and Western bankers warned this week that failure of the scheme, which had been allowed to spiral out of control by the neo-Communist Government, portended grave social and economic consequences for the country.

Pyramid schemes, which have historically popped up in different countries in hard times, survive as long as higher and higher returns can lure investors. Caritas promised a particularly spectacular return of 800 percent after 90 days. But deposits cannot rise exponentially in perpetuity. It is a matter of time before people lose interest, funds evaporate or the authorities shut the scheme down.

But early on, investors in such schemes can get rich. In Romania, politicians and businessmen are reported to have cashed in early and even been given their returns without having to wait the full three months. None of the money was invested outside Caritas.

But the most recent investors seem destined for disappointment. They include the thousands of peasants, factory workers and miners who trekked in on special buses, trains and even donkey carts to this north central Romanian city of 320,000 this summer and fall.

Some Romanian officials said they feared a violent backlash from the nation's miners, whose volatile union leader, Miron Cosma, inexplicably embraced the scheme during its last gasp several weeks ago. In 1991, Mr. Cosma led miners on a rampage through Bucharest that resulted in the downfall of the Government.

"I'm really very concerned," said Dan Pascariu, the chairman of the Romanian Bank of Commerce, adding that he estimated that three or four of every eight families in the country had invested. "There could be riots by those who are the losers. I think the founders of the scheme made a big mistake by going to the miners. You don't kid with these people."

Daniel Daianu, the chief economist of the National Bank, said: "The new austerity from the I.M.F., combined with the psyche of a population after the collapse of Caritas, could increase the likelihood of social disruption. There's already a lot of opposition to the I.M.F. measures."

Mr. Daianu has been publicly warning for weeks that the scheme is a fraud, but the Government of President Ion Iliescu, nervous about its grip on power and afraid that closing the scheme would make the Government even more unpopular, has refused to stop it. Mr. Iliescu was a high official in the Ceausescu Government.

"This is something that should have been debated but everyone is shunning responsibility," Mr. Daianu said. Sullen Population

Others predict widespread bitterness among a sullen population already fed up with an economy that has declined even below the depths reached by the Communist regime of Nicolai Ceausescu.

Only recently, and too late for many, several Romanian newspapers have carried a number of reports on the expected collapse of the scheme.